Secured creditor priority over tax attachment; mortgage protected where no notice of pending income-tax liability was shown.

A secured creditor's statutory priority under Section 31B of the SARFAESI Act prevails over a later attachment and recovery action by the Income Tax Department against mortgaged property, so the earlier security interest is not defeated by Government dues. The mortgage is also protected under the proviso to Section 281(1) of the Income-tax Act, 1961 where it is supported by adequate consideration and no notice of pending income-tax proceedings or tax liability was shown before its creation. On that basis, the bank's secured interest was treated as effective against the departmental attachment, and the revenue entries were directed to be lifted.

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Issues: (i) Whether a secured creditor has priority over subsequent attachment and recovery action taken by the Income Tax Department against the mortgaged property. (ii) Whether, in the absence of notice of pendency of income-tax proceedings or tax liability, the mortgage in favour of the bank is hit by Section 281(1) of the Income-tax Act, 1961.

Issue (i): Whether a secured creditor has priority over subsequent attachment and recovery action taken by the Income Tax Department against the mortgaged property.

Analysis: The statutory priority accorded to secured creditors under Section 31B of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 gives precedence to the realisation of secured debts over Government dues. The provision operates notwithstanding other laws and applies to pending disputes, so a later departmental attachment cannot defeat the earlier created security interest.

Conclusion: The issue is answered in favour of the bank. The secured creditor has priority of charge over the mortgaged property.

Issue (ii): Whether, in the absence of notice of pendency of income-tax proceedings or tax liability, the mortgage in favour of the bank is hit by Section 281(1) of the Income-tax Act, 1961.

Analysis: Section 281(1) renders certain transfers void against revenue claims, but the proviso protects a transfer or charge made for adequate consideration and without notice of the pendency of proceedings or tax liability. On the record, no notice of pending income-tax proceedings or liability was shown to have been given to the bank before creation of the mortgage, and the exception in the proviso was therefore attracted.

Conclusion: The issue is answered in favour of the bank. The mortgage is not void under Section 281(1) of the Income-tax Act, 1961.

Final Conclusion: The bank's secured interest prevailed over the departmental attachment, and the writ petition was allowed with a direction to lift the attachment and delete the revenue entries.

Ratio Decidendi: A secured creditor's right to realise secured debt has statutory priority over Government dues, and a transfer or mortgage for adequate consideration without notice of pending income-tax proceedings or tax liability is protected by the proviso to Section 281(1) of the Income-tax Act, 1961.

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